1. Save first….Then spend

You get your salary each month. What should you do with this money? Should you spend FIRST…then save what is left behind?

OR

Should you first save your money and then spend what is left?

The answer to this difficult question is given to you, by the great investor, Warren Buffett himself. “Do not save what is left after spending, but spend what is left, after saving.”

EARN – SAVE = SPEND

So how much should you save from your monthly income? You can start by saving at least 20% of your monthly income. This money could be very useful in a financial emergency.

What happens if you do not save money? When you fall in financial difficulty, there is no one to help you. You also need to tell your family, about the need to save. Otherwise, you would be saving and they would be spending.

The path to great riches, is just saving with a lot of discipline.

2. Spend on needs…Not wants

“If you buy things you do not need, soon you will sell things you need.”

- Warren Buffett

You have money in your pocket? Should you spend this money on anything you see? This is your hard earned money. To spend your money wisely, you need to understand the difference between a need and a want. Need is something you have to have. Want is something you would like to have.

Food…clothing…shelter…are all necessities. But if for you, laptop…car…trip abroad…new shoes every week is a necessity, then you better understand the difference between a need and a want.

Find it difficult to distinguish between a need and a want? Try the 30-day rule. Just postpone a costly purchase by 30 days. If you don’t feel like making a purchase after 30 days…then you don’t really need the item.

This is a piece of friendly advice for the New Year, to help you control spending. Never spend using a credit card. Spending using a credit card is not a bad thing. But…if you don’t know to use one, you would most likely overspend.

“You must gain control over your money or the lack of it will forever control you”.

3. Borrow to create an asset. Not for spending

In life, there are times when you just need something really badly and just don’t earn enough, to pay for it. You have no choice, but to borrow. If you must borrow, then do so for something you really need. You have to repay the money you borrow with interest. Can you do so?

Availing a home loan to buy your dream home is a good idea. You get a roof over your head and you can always rent your home, to support you in old age. Availing an education loan to give you a good education and a bright career, is a great idea.

But what about the money you borrow, just to enjoy yourself? You avail a personal loan to buy some item you don’t really need, or go on a foreign trip just to show off? Your bank charges a very high interest on the personal loan. You could struggle repaying this loan, fall in the debt trap and lose your piece of mind. A personal loan is an emergency loan. Use it only for a real financial emergency.

“The EMI’s you pay for all your loans combined, should not be more than 50% of your net monthly income.”

4. Invest to Prosper. Not for an obligation.

Investing is putting your hard earned money in financial instruments you are comfortable holding, with an expectation of earning a profit. Before investing your money, ask yourself this question…Why are you investing?

If you are investing to build an asset, which in turn helps you to earn more money and support you, now and in old age, you are on the right track. You are investing to prosper. Your investments are following the simple approach…Money earns more money with time, through the power of compounding.

But are you investing your hard earned money, just on a friend’s advice, without doing your research? Are you making an investment, just to please family or friends? If you do this, you are investing to meet an obligation, not to prosper. You can prosper only if investments help you meet financial goals.

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Mr. C.S. Sudheer

Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.